August 31, 2010 – The Coming Takeover Wars

1) The Coming Takeover Wars. The spate of takeover bids we have witnessed in recent weeks, the BHP Billiton (BHP)-Potash (POT) deal, the Sanofi Aventis (SNY)-Genzyme (GENZ) deal, Intel's (INTC) acquisition of Infineon Technologies (IFX), and the ongoing bidding war by Hewlett Packard (HPQ) and Dell (DELL) to swallow 3Par (PAR), is telling the rest of us reams about the broader market.

Virtually all of the recent bids have been made for cash. That means that the acquiring companies believe that both their own and their target's share prices are historically cheap. That may be debatable, depending on whether you think the long term US GDP growth rate is 2%, or is going back to the torrid 3.9% we saw in the last decade.

The real education here is the outing of the industries that are attracting the premium bids. Those include agriculture, energy, commodities, biotechnology, and technology, especially in cloud computing and mobile applications. BP (BP), an oil major, is said to be attracting covetous eyes while its stock is in the basement. Also notice the foreign origins of many of the targets, which underlies my theme that 90% of global earnings for the next ten years are coming from outside the US.

Regular readers of this letter will recognize these industries as part of a handful of major growth leaders for the next decade. By watching the M & A action, you are letting the giants with deep pockets needed to fund massive research efforts do your sector selection for you. Direct investment always leads activity in listed share markets, often by years. Ride on their coat tails for free.

It all reminds me of the 'Pacman' takeovers of the early eighties, when Boone Pickens said that it was cheaper to prospect on the floor of the New York Stock Exchange than in the oil patch. The 2010 iteration of that statement has to be that it is cheaper to hire people through takeovers than to hire them outright. The hard truth is the net effect of these mergers is almost always a reduction of the labor force. This is why the jobs picture has not, and will not improve. To boost your investment performance, keep close tabs on newly announced takeovers, or easier still, keep reading this letter.

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